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Thursday, April 23, 2009

In Case You Needed More Proof That There Are Few If Any Genius Investors

From the WSJ

APRIL 22, 2009.Managed Funds Take Beating From Indexes .By SAM MAMUDI

NEW YORK -- Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time.

That is double-bad news, given that the index was down 19% in the five years that ended Dec. 31. The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds.

What's more, those numbers are similar to the previous five-year cycle. From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 fell 18.8%, but still beat 71.9% of U.S. actively managed large-capitalization funds, according to S&P Index Services.

"We consistently see that once you extend time horizons to five years, the majority of active managers are behind their benchmarks," said Srikant Dash, global head of research and design at S&P.

Things were even worse for small-cap active managers, Mr. Dash said. The S&P SmallCap 600 outperformed 85.5% of small-cap funds. That index fell 0.6% over the five years to Dec. 31.

Even among emerging-market funds, most lagged behind their comparable S&P index. The S&P/IFC Emerging Markets Index bested 89.8% of actively managed emerging-markets stock funds in the past five years.

Actively managed bond funds also struggled. Except for high-yield funds, at least 80% of bond funds trailed their comparable benchmarks across all categories, Mr. Dash said. Because of liquidity issues, bond benchmarks aren't as easy to replicate by index funds.

You can hear a podcast from on the subject here:

And the full S+P report is here.Two interesting points from the data

In 2008 80% large cap value managers outperformed the large value index. As pointed out here several times (and is mentioned by the analysts on the podcasts) this can be explained by the high weighting of financials in the large value indexes and doubtless many large value active managers limited their allocation to financials.

Advocated of active management often argue that as one moves into markets that are potentially less efficient the opportunities for outperformance by active managers increases, Emerging markets are often cited as an asset class where this would be the case. Yet the S+P data show that emerging market active managers do far worse than active managers in developed international and US markets in outperforming their index. Only 16% of active managers beat their index over a 3 year period and a little over 11% did so on a five year basis. For International developed the numbers were 24.5% and 26.5% respectively and for large cap US 35% and 28%.

Professor Eugene Fama of Yale and Kenneth French of Dartmouth have an academic paper on this issue that can be downloaded here.

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